The demands of running your business make it difficult to stay on top of your finances, including your tax return. Use these tips to identify nine Tax Deductions for your landscaping business.
What’s your business structure?
To understand your tax deductions, start with the end in mind. In this case, the end result is the type of tax return you must file for your landscaping business, and the business structure you choose determines the type of tax return you file.
Now, most tax deductions are allowed on each type of business tax return. Marketing expenses, for example, are allowed for all landscaping firms, but the tax return you must complete may look very different, depending on the structure you choose.
The best way to understand the differences is to consider C corporations (C Corps) vs. all other business structures:
- C Corporation: C Corps are subject to double taxation. The C Corp files a tax return and pays taxes on net income (profit). The owners can retain after-tax earnings for use in the business, or pay shareholders a cash dividend. If a dividend is paid, the dividend income is added to other sources of income on the shareholder’s personal tax return. Because a C Corp tax return is a separate tax filing from your personal return, and all of your tax deductions are listed on the C Corp return.
- Pass-through entities: Most other business structures pass the company profits and losses directly to the owners. Sole proprietorships, partnerships, S Corporations, and many other businesses are referred to as pass-through entities. If you choose a pass-through entity structure, you will be posting some business activity to your personal return. Check with an accountant to understand where tax deductions are posted for your pass-through business structure.
Don’t wait until tax time to review your tax return details. Check with your accountant before year-end, so that you can post your tax deductions correctly.
Jim owns Sunset Landscaping, which operates as a C Corporation. Jim’s business structure requires him to generate a separate C Corp tax return, and the company return includes his firm’s tax deductions. As the sole owner, Jim pays a dividend to himself out of company profits, and the dividend is taxed on his personal return.
|Sunset Landscaping||Income Statement for period ending December 31|
|Cost of Sales|
|Materials(sod, mulch, flowers)||150,000|
|Labor (work crews)||230,000|
|Total Cost of Sales||380,000|
|Home office costs||7,000|
|Repair and maintenance||4,000|
|Total Operating Expenses||70,000|
Sunset’s 2018 net income is $52,100, and the C Corp pays taxes on the net income. If the after-tax profits total $37,000, and the entire amount is paid as a dividend, Jim will include the $37,000 dividend as income on his personal return.
#1 and 2- Direct materials and labor
It’s important to review the entire income statement so that you understand how each expense item is posted to the tax return.
To start, note that a large dollar amount of material and labor costs are deducted from sales to calculate gross profit. These are considered direct costs because they can be traced directly to landscaping work.
Jim purchases mulch, sod, and flowers for landscaping projects, and the costs are deducted as materials. The company also deducts labor costs for workers who provide landscaping work at the client’s home or business.
All of Sunset’s field workers are classified as part-time, independent contractors, so the company does not withhold taxes or other benefits from wages.
#3- Office Salaries
In 2018, Jim paid wages to his office manager, Bruce, who handles customer billing, company bill payment, and work crew scheduling. Bruce is a full-time employee, and Sunset withholds and pays federal income tax, state income tax, and FICA taxes, based on Bruce’s salary.
FICA taxes provide funding for Social Security and Medicare, and both the worker and the employer pay FICA taxes. Sunset’s portion of FICA taxes paid is a tax deduction on the business tax return.
In this simple income statement format, Bruce’s gross wages and Sunset’s FICA expense are included in office salaries.
Jim purchases assets for Sunset Landscaping, such as trucks, stump grinders, and tools, and the assets are used to generate sales and profits. Depreciation represents a decline in value of an asset, as the asset is used to generate sales.
Businesses recognize depreciation expenses as a tax deduction, but the depreciation calculations differ between assets. An asset is depreciated, based on the useful life assigned by current tax laws. A $30,000 truck, for example, may be assigned a five-year useful life, which means that the entire $30,000 cost will be expensed over five years.
As your business grows and you purchase dozens of assets, you need to use tax software to calculate and track the dollar amount of depreciation on each asset. To save time, many companies have their accounting firms track depreciation expense.
Some assets are not depreciated, because the dollar amount is small, or the asset will be used up quickly. If Sunset pays $25 for a hammer, as an example, the cost of the hammer will be immediately expensed. Jim only recognizes depreciation on more expensive assets, and assets that will be used up over a period of years.
To address this issue, your business should create a depreciation policy, which states that an asset must cost above a specific dollar amount of being depreciated, maybe $200 or more, as an example. This type of policy reduces the time needed to calculate depreciation expense because you depreciate fewer items.
#5 to #9: Other Expenses
Sunset incurs other expenses that are tax deductible:
- Insurance: This category includes insurance on vehicles and equipment, and professional liability insurance, to cover the business if a customer’s property is damaged. Jim will also pay for worker’s compensation insurance, which each state requires for companies doing business in that state
- Home office costs: This expense category includes office supplies, utilities, and phone costs, among others. Ask an accountant to help you decide how much expense detail to include on your tax return.
- Marketing: Marketing and advertising costs are expensed as they are incurred each year.
- Repair and maintenance: This may include expenses for vehicle, equipment, and home office building repairs.
- Mileage: Jim can deduct mileage costs incurred as his work crews drive between jobs.
To simplify the tax preparation process, Jim should create account titles in the income statement that closely follow the expense items in the tax return. This system makes it easy to transfer data to a tax return, and to verify that all the expenses are included.
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Making smart decisions about your tax return can reduce your tax bill, and the amount of cash required to pay the bill. Invest in accounting software to generate your financial statements and tax software to convert your financial data into a tax return.
Use these tips to understand your landscaping company tax deductions, and to prepare an accurate tax return. You got this!
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